For the most part, ERP software vendors are following similar business models for reaching the new ASP market. With the exception of Oracle and start-up Biztone.com, the ERP software vendors are forging a sometimes complex series of alliances and partnerships to reach the ASP market. SAP, PeopleSoft, and Lawson have joined with new allies, including systems integrators, telecommunications companies, hardware companies, and dedicated ASPs. Baan, J.D. Edwards, and Great Plains, companies that have traditionally relied heavily on a network of resellers to reach vertical markets, are looking to leverage those existing relationships into the ASP space.

In contrast, Oracle and Biztone.com offer their own applications directly to the end customer, skipping partners. For both, their own ERP applications form the core of their offerings. Oracle, in fact, has a two-pronged approach to the ASP market. It will sell application services to traditional corporate customers and sell a complete software infrastructure to other ASPs that don't have their own ERP suites.

The ERP vendors are relying heavily on their applications to provide them with a competitive advantage.

Profits are largely nonexistent in the nascent ASP market, but that's to be expected in any new territory. All of the ERP vendors have formed separate profit and loss centers on their balance sheets for their ASP initiatives, though none of them are willing to give out numbers just yet. Oracle's Business OnLine (BOL) is the most formal manifestation of that approach, and may be spun off as a separate company later on. Oracle is also the only company in this market that claims a profit so early in the game, with 25 signed customers, and about half in production.

Of all the ERP software vendors, however, J.D. Edwards claims to have 27 customers in production, according to the company's vice president of outsourcing Gayle Sheppard. Still, Sheppard doesn't claim profitability.

Making money is no problem as far as Tom Melchiore, SAP's director of outsourced solutions is concerned. "We know what our costs are," says Melchiore. "We can build our margins into the monthly rental fees."

Competitive advantages

With so much in common, the ERP vendors are relying heavily on their applications to provide them with a competitive advantage. Some stress service levels and reliability. Oracle's Business OnLine, for instance, promises 99.3% application availability and 100% network availability in its standard contract, says Oracle BOL vice president of sales and marketing Gary Robinson.

PeopleSoft, on the other hand, stresses customer service. Farrell Griswold, PeopleSoft's director of new business development, says the company's ASP customers sign only one contract and have only one interface for support and problem resolution. In contrast, Griswold contends that some of the other ERP vendors require customers to negotiate and sign multiple contracts--one with the ERP vendor, one with the vendor's hosting partner, and possibly a third with an implementation partner, for example. And service and support is just as complex, he adds.

All of the ERP vendors offer customers the choice of renting applications from an ASP or purchasing the software, either upfront or over time, and then outsourcing the actual application hosting, management, and servicing. Because the situation varies so much from customer to customer, and the market is so new, there are no standardized price points yet that can give one ERP software vendor a competitive pricing advantage over another.

Prices vary from customer to customer, and vendor to vendor, depending on the number of applications, the number of users, and the service provided. These software vendors essentially have the pricing power to make their margins. SAP's published prices, for instance, range from $400 to $600 per user, per month. Obviously, the lower the cost, the more customers ERP vendors can reach via the ASP channel. "Pricing will be key in this market," says Dataquest's May.

The ASP market could even conceivably weaken any competitive advantage ERP vendors have today, notes Zona's Marshall. The risk is that margins will plummet and compel vendors to scramble for customers in order to turn a profit.

Although they originally started in financials, HR, and manufacturing, the larger ERP vendors have expanded the scope of their applications suite to encompass additional areas such as supply chain management and customer resource management (CRM). Despite their broad product lines, each of the major players in ERP software today possess particular strengths in their application suites--SAP in manufacturing, Oracle in financials, PeopleSoft in HR, for example. There's little to stop a pure-play ASP such as USi or Corio from creating a "best-of-breed" suite comprising the strongest applications from each vendor, and integrating them, at least superficially, with a common Web-based front end. This, in fact, is Usi's basic business approach, says USi vice president of strategic development Jim Stalder. "You can look at our product line today and it's not difficult to see the gaps we're likely to fill," he says.